Questions about banking we’re too embarrassed to ask

We’re clueless about some of this stuff

KARACHI: Banks have made all our money related problems super easy. But while we’re all consumers in some way or the other, very few know how banks actually function. Here’s how!

1. How do banks earn money?

Banks raise funds by lending money at a higher rate of interest than they borrow it. This money is borrowed from other banks or from other customers who deposit money with them.

Banks also make money by charging their customers a fee for services, such as managing their accounts, and through bank charges, such as the annual maintenance fee, charges for cheque books and the sum of money incurred on transactions.

2. What is mark-up?

The amount added to the cost of a commodity to cover expenses (the profit) or the difference between selling price and cost price, computed as a percentage of either the selling or the cost price. The seller in this case, is the bank. However, mark-up isn’t just a banking term. It’s a term also used in other businesses.

3. What is a savings account?

A savings account is the most basic type of bank account and is used by individuals (single or joint accounts) to deposit money for carrying out various day to day financial transactions. These accounts do not have any maturity or end date; unless the customer specifically requests for a closure, the accounts remain open. Savings accounts generate interest on the money deposited in them. Banks will not allow unlimited transactions a month through these accounts. Every bank has a limit to the number of free transactions allowed, after which a customer is charged a fee for withdrawing money.

4. What are current accounts?

Current accounts are used to facilitate everyday transactions and are not used for savings or investments. There are two different types of accounts within this: Company accounts (held by business owners) and personal accounts.  Like savings accounts, current accounts also don’t have any maturity or end date. They are not interest-bearing accounts and they have no limits on the number of transactions that can be carried out on a monthly basis.

5. What does the term “return on savings” mean?

‘Return’ is profit made on an investment. This return is proportionate to the amount that you originally invest. The time-period is typically a year. A loss instead of a profit is described as a negative return.

6. What is the difference between Mastercard and Visa?

There is no real difference between Mastercard and Visa. They are both simply methods of payment. They rely on banks in various countries to issue credit cards that utilise these payment methods. Therefore, the interest rates, rewards, annual fees, and all other charges are issued by your bank and when you pay your bill, you are paying it to the bank or institution that issued your card and not Visa or Mastercard.

7. What is a SWIFT code?

A SWIFT code is an international bank code that identifies particular banks worldwide. It’s also known as a Bank Identifier Code (BIC). Banks generally use SWIFT codes to send money to overseas banks.

8. What is private banking?

The term private banking refers to a customised line of banking and financial services offered to private individual banking clients that earn high levels of income and/or own sizeable investment assets, also known as ‘High Net Worth Individuals’ (HNWIs). Private banking is also offered by banks to account holders for easy online banking to enable you to manage your account online so that you can make online transfers and payments, among other things.

Information has been provided by Syed Hussain Ali, a credit analyst at Faysal Bank, Karachi.

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